9088 / Are there any circumstances under which a beneficiary's interests in a spendthrift trust may be reached by creditors or other third parties?

The first and fairly obvious way a third party may reach a beneficiary's interest in a spendthrift trust is if the trust itself is invalid or the spendthrift provision is invalid. If a trust does not exist, then a spendthrift provision does not protect any of the beneficiary's interests. Furthermore, a spendthrift provision is invalid if it does not manifest the settlor's intent to create the spendthrift trust.

After a Distribution is made to Beneficiary

In addition, the interest is only protected while properly held in trust. Once the trustee makes a distribution to the beneficiary, creditors may reach the interest through the same procedures that apply generally to property of the beneficiary.

Supplies & Necessities for the Protection of Beneficiary's Interest in the Trust

A claim by someone who renders necessary services or gives necessary supplies to the beneficiary can also access the beneficiary's interest in a spendthrift trust.¹ To refuse recovery for providing necessities to the beneficiary would frustrate the settlor's purpose of protecting and providing for the beneficiary.²

In addition, a beneficiary may find it difficult to obtain services essential to protecting and enforcing his or her rights under the spendthrift trust if claimants who provided assistance had no means of recovering from the trust.³ Thus, a claimant who has an enforceable unjust enrichment claim may reach a beneficiary's interest in a spendthrift trust.⁴ This includes those who provide services or materials for preserving the beneficiary's interest in the trust, or for goods and services that increased the value of the beneficiary's interest.⁵

Example: S's will leaves his residuary estate to T upon a spendthrift trust for B for life, remainder to R or R's issue. Shortly before death, S amended the trust by a codicil by which C is added as a life beneficiary to share the benefits of the trust with B. B institutes an action to contest the codicil. C employs attorney A to represent him in the action, and the codicil is upheld. Although subject to a spendthrift restraint, C's interest in the trust can be reached by A in payment for her services in protecting that interest. It is within the discretion of the court to determine how much of each distribution A should receive as a matter of fairness both to her and to C.⁶

Public Policy

Occasionally, public policy calls for a spendthrift provision to be invalid. The following examples are not an exclusive list because courts continue to define what exactly violates public policy based on special circumstances and evolving policy. This section will explore common instances.

If the Settlor is Also the Beneficiary

A settlor of a spendthrift trust cannot also be the beneficiary of the trust.⁷ The most common reason a settlor attempts this is to protect his personal estate from issues concerning a business. However, it is against public policy to allow a settlor to enjoy his own property but not be responsible for the liabilities and debts that he creates.

A small number of states have recognized a rare exception where a settlor may also be the beneficiary. If a settlor/beneficiary is a prisoner, a few states have recognized it does not violate public policy for such a person to tie up his property because he is not in a position to defraud creditors. Rather, a prisoner has an interest in protecting his estate from those who may try to take advantage of him because of his current incarceration.⁸

Spousal or Child Support

An enforceable claim by the beneficiary's spouse or children for support can invalidate a spendthrift provision.⁹ On public policy grounds, typically a beneficiary cannot enjoy a favorable interest while neglecting to support his dependents.¹⁰

Alimony

In states that provide for spousal support, a spendthrift provision may be invalid to protect against an ex-spouse's enforceable claim for support.¹¹

Federal Tax Obligations of the Beneficiary

A government claimant can reach a beneficiary's interest to the extent provided by federal law or an applicable state statute.¹² Bankruptcy, however, generally respects the spendthrift trust.¹³

Tort Claimants

In some jurisdictions, tort claimants have been able to access a beneficiary's interest within a spendthrift trust. When a tort claimant is an innocent party that has suffered harm, a court is not likely to protect a beneficiary's trust interest, especially when the beneficiary acted willfully or fraudulently.¹⁴